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Business and Finance

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Anika Marco

on 28 September 2012

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Transcript of Business and Finance

and Finance Fundamental Concepts
and Tools of Business Finance Basic
Concepts Finance Definition Definition “the provision of money when and where acquired”
- Bannock “finance is the science of managing money,
on either a public or private scale.”
- Webster “finance is that administrative area or set of administrative functions in an organization which has to do with the management of the flow of cash so that the organization will have the means to carry out its objective as satisfactorily possible and at the same time meet its obligations as they become due.”
- Howard Categories deals with an area of general finance which is not classified under public finance Private Finance deals with the revenue and expenditure patterns of the government and their various effects in the economy Public Finance concerned with the fundamentals of managing one's own personal money affairs. Personal Finance includes private undertakings such as charity, religion, and some private educational institutions. Finance of Non-
Profit Organization the term business finance refers to the provision of money for commercial use. However, it is also concerned with the effective use of funds. Business Finance it covers financial management of private profit-seeking concerns in the business of service, trade, manufacturing, mining, public utilities and financing. Goals of
Business Finance realizing the highest possible
peso or dollar. Maximizing
Profit when a firm decides on obtaining a higher rate of return on its own investment Maximizing
Profitability the objective of the firm is to maximize the current value of the company to its stockholders Maximizing Net
Present Worth maintaining too large a cash balance reduces the potential rate of return while running out of cash is disastrous. The ideal set-up is to maximize profit while at the same time maintaining the cash balance that will satisfy both requirements. Maximizing Profit
Subject To a Cash Constraint Seeking an Optimum
Position Along a Risk-Return Frontier Natures and Aims
of Business Any lawful economic activity which is concerned with making goods available as well as the rendering of useful services to those who want them. (Miranda) All effort primarily concerned with providing for the interested public’s legitimate needs, at the required time and place, at an equitable price, and with reasonable returns to compensate the businessman for his efforts and risks. (Ignacio) is equal to the value now of the firm including values arising in the future. Net Present Worth computed on its present worth and is added to the other values of the firm with the present. Values arising
in the future this concept indicates that money increases in value as time passes. Time Value of Money What is the value today of Php100,000 to be received next year? Assume that the prevailing rate of interest is 10% p.a. Calculation of the
Present Worth the optimum position of risk and return may be determined by calculating the expected value of alternative decisions.

expected value of a return on investment = return times the percentage of probability that will happen (risk factor) Calculation of Expected Value using Risk and Return Risk refers to the uncertainty as to loss. When used in finance, the terms applies to the potential incurrence of loss of money or its equivalent. Definition of Risk the net income generated by the use of investments or the net-worth of a firm is referred to as return on investment. (Rate of return when expressed in percentage.) Definition of Return on
Investment or Net Worth a firm can set a goal of achieving the best possible combination of risk and return. 5+7= (cc) image by anemoneprojectors on Flickr Any lawful economic activity concerned with the production or distribution of goods or services for profit. Involves providing and selling s product or service with the aim of obtaining rewards for the private owners (Oxenfeldt) Roles of
Business Business firms and the government are oriented towards the provision of goods and services to the society. Business is largely responsible for bringing into the market a wide array of products which was not made available in the past. Kinds of
Business mainly concerned with production of:
*consumer’s goods – goods which are intended for ultimate consumption
*producer’s goods – intended for use of business and industry Industry building infrastructures (airports, seaports, dams and highways); construction of dwelling houses Construction
Industries convert raw materials into finished products (manufacture of drugs, plastics, food, liquor, footwear, motor cars, tools, office supplies household appliances, etc) Manufacturing
Industries extraction of goods from
natural resources
(mining, lumbering, hunting
and fishing) Extractive Industries agriculture, forestry and fish culture Genetics Industries Classifications sells services to buyers Services movie houses, television and radio stations, theaters for drama and stage presentation Recreation restaurants, barber shops, transportation, hotels, tailoring shops Personal banks, insurance companies, investment houses, financing institutions, credit unions, savings and loan associations Finance buying and selling of goods and services

trading, merchandising and marketing Commerce Examples:
dry goods store, peddlers,
sari-sari store, importers Objectives
of Business primarily for profit however, short-term and long-term profits are sacrificed in order to attain non-economic goals like: prestige and popularity; family control; social consciousness professional managers maintain that a business firm should attain the following multiple objectives: economy and effectiveness of operation the creation and distribution of a product or service the satisfaction of personal objectives protection and enhancement of the human and physical resources of society ORGANIZATION – first stage in the life cycle of a business Organizing
a Business is one of the options available to persons who would want to engage in a business Entrepreneurship A person goes into business to enjoy certain values which are derived from such undertaking. These values are: The Decision to Engage in a Business power livelihood personal satisfaction service to the community and to employee profit social approval protection one who runs a business
he himself has created Entrepreneur Functions to supply the capital of the firm to organize production by buying and combining inputs to decide on the rate output in the light of his expectations about demand to bear the risk involved in these activities A person searching for a suitable business opportunity should learn the ways of a talent scout and a salesman looking for a prospect. The Search for
Business Oppurtunities a person should carefully scan the environment for possible openings Business Prospecting Talent Scout aware of the requirements of the market – radio, television, recording and the movies goes around
searching stays longer in places where talents abound does not forget that there are lots of good talents but only a few of them can be classified as “commercial” Like a talent scout, the prospective businessman should choose an opening that will be “commercial” or one that will bring him enough revenues. prepares a list of his prospects and from there makes his evaluation and decides who is worthwhile seeing

does not forget that there are prospects of better quality than others Salesman Like a salesman, the prospective investor should pick up from his list a business opportunity which is better quality than the others. Business opportunities come in several forms. They could be a result of any of the following: Forms of
Business Oppurtunities increasing demand for an existing product rising price (or cost) of an existing product liberalization of government policies the development of a new service concept the rising requirements for specialized services the increasing requirements for the wholesale and retail industry the increasing demand for local productions Business Promotion refers to the discovery and exploration of a business opportunity with the purpose of converting it into a going concern 3 STEPS 1. Discovering the idea for a new business The new business idea may be a result of various opportunities. The business promoter may also be induced to consider certain product ideas because of the availability of raw materials 2. Determining the Feasibility of the new idea Feasibility Study detailed investigation and analysis of a proposed business venture to determine its viability The appropriate form of organization Must contain some or all of the following portions: Marketing Study Management Study The appropriate form of organization The internal structure of organization The owners The staffing pattern of organization The future total demand for the product  The competitive situation of the product in the industry Future selling prices An estimated annual sales volume A marketing program Technical Study The manufacturing process selected, if applicable The rated capacity of the plant The design of the machinery The location and lay-out of the plant The specifications of the structures The requirements for operation tax burden applicable to the project; tax burden should be legally minimized Taxation Study source of financing for the project. Particular attention is given to selecting the most attractive financing scheme using factors of cost and availability Financing Study the rate of return using various approaches Profitability provide the social returns applicable to the project. It should present the benefits that will be provided by the project in the community. Social Desirability 3. Assembling the needed resources to start a business INITIAL CAPITAL REQUIREMENTS to take care of the following: includes payments made for business permits and licenses, incorporation taxes, business name, etc. Cost of Organizing required to finance inventories and supplies, salaries and wages, power, water, rent, insurance, transportation, advertising and sales promotion; maturing obligations; credit sales Working Capital may be acquired by purchases or lease depending on the nature and requirements of the firm Fixed Assets required to take care of difficulties encountered due to insufficient income generated by the firm Reserve Fund also included are lawyer’s fees for initial legal requirements (whenever applicable) promoter’s fee and the cost of obtaining franchises, licenses for patents on required inventions and licenses for copyrights on required literary or artistic works refer to business assets which are acquired for continuous use in the production of goods and services b.SOURCES OF INITIAL CAPITAL Owners savings or sell some of their properties single proprietorship and partnership raised by the sale of common stock to the founder of a firm and the small group of intimates corporation friends or relatives; government; financing institutions; suppliers Creditors Banks RETENTION
OF CONTROL used to obtain initial control of the land and buildings required LEASE agreement whereby one person grants another the right to buy a certain property at an agreed price, at or within a stated future time OPTION CONTRACTS an exclusive right granted by the franchisee to the franchisor for the operation of a public utility service, or the selling or distribution of a product in a specific area. FRANCHISE a right granted by the government to a concessionaire for the exploitation of natural resources placed at his disposal for a sum consisting of a minimal periodic payment plus a percentage of the income from sales CONCESSION gives the holder the sole right to make, use, or sell his invention during the period the patent remains in force PATENT gives the holder the monopoly on the exploitation of a literary or artistic work for a certain period subject to renewal COPYRIGHT Valuation is the person responsible for the formation of a company The promoter sees the opportunity for a new business, interests other people in it, makes the business blueprint, arranges for the initial funds, labor, and skills required, and sets the business going Classifications: his/her main occupation is business promotion PROFESSIONAL PROMOTERS perform promotion activities occasionally SIDE-LINE
PROMOTERS banking institutions which provide business promotion services to their clients BANKING PROMOTERS composed of investment houses engaged in the promotion of certain business ventures through the sale of securities FINANCIAL PROMOTERS engaged in the development of new subdivisions SUBDIVISION
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